TaxTMI 
TaxTMI 
2020 (1) TMI 1756
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that, a. Share application money remitted by the Appellant to its associated enterprises ('AEs'), IZMO Inc., US, and IZMO Europe BVBA constitutes an international transaction involving provision of an interest free loan. b. The Appellant should have earned an interest on the funds remitted towards the share application money. 3. The Hon'ble DRP and the LAO erred in confirming the order of the Learned TPO which had held that receivables due to it from its AE, Homestar LLC, US, and outstanding beyond 6 months constitutes a loan and a notional interest has to be charged on the same. 4. Without prejudice to the above grounds, the Hon'ble DRP and the LAO erred in confirming the order of the Learned TPO, which has wrongly computed the arm's length interest amount on the receivables due to it from its AE and outstanding beyond 6 months: a. By computing the interest at the rate of 14.74% as satisfying the arm's length principle instead of adopting the LIBOR rate. b. Computing the interest on the impugned advances by applying the rate of interest on the amount of aggregate of funds for the year, without appreciat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rice Charged Rs. NIL Adjustment u/s. 92CA Rs. 5,75,90,408 6. On Appeal by the assessee, the CIT(Appeals) confirmed the order of AO. 7. At the time of hearing, it was brought to our notice by the ld. counsel for the assessee that identical issue had come up for consideration in assessee's own case in AY 2009-10 before this Tribunal in IT(TP)A Nos. 280 & 243/Bang/2014, and by order dated 22.2.2017 it was held that the transactions in question were in the nature of international transactions, but however directed the TPO to apply LIBOR rate of interest. 8. In so far as the transaction of payment of money as share application money to the AE, the following were the observations of the Tribunal in this regard:- "34. We have considered the rival submissions as well as the relevant material on record. As regards the question of treating the share application money as international transactions, there is no dispute that in ordinary circumstances if the remittance is made as share application money for allotment of shares and shares are allotted within a reasonable period of time then the said payment of money to the AE cannot be considered as loan or advance for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....propriate to apply the LIBOR rate for determining the arm's length interest. Further the computation of the interest has to be from the date of remittance till the end of the financial year. Accordingly, we direct the TPO/A.O. to recompute the arm's length interest in respect of this transaction by taking into consideration LIBOR and the period from the date of remittance till 31.3.2009. As regards allowing the time period of 180 days, since this is not a case of an ordinary time period of allotment and therefore when this money was available with the AE for use then we do not find any merit or substance in this contention of the learned Authorised Representative." 9. Insofar as question regarding allowing extended period in respect of trade receivables beyond six months and attributing income on account of interest on account of such extended credit period, in assessee's own case for the AY 2009-10 vide order dated 22.2.2017 (supra) reported in [2011] 8 ITR (Trib.) 525 Bang., this Tribunal has held that giving a long credit period beyond six months on trade receivables constitutes an international transaction and ALP on such transaction has to be determined. 10. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rsistent Systems Ltd. 30.35% 6 R S Software (India) Ltd. 10.29% 7 Sasken Communication Technologies 17.36% 8 Tata Elxsi (seg) 21.88% 9 Thinksoft Global Services Ltd. 17.05% 10 Zylog Systems (India) Ltd 19.06% 11 Evoke Technologies Pvt. Ltd. 18.75% AVERAGE MARGIN 22.93% 13. On the basis of the above arithmetic mean of profit margin of the above comparable companies, the TPO computed the ALP in the software development services segment as follows:- "SOFTWARE DEVELOPMENT SERVICES Arm's Length Mean Margin on cost 22.93% Less: Working Capital Adjustment (Annex. B) -6.75% Adjusted margin 29.68% Operating Cost 16,09,64,911 Arms Length Price(ALP) @ 129.68% of Operating Cost 20,87,23,200 Price Received 18,36,62,314 Shortfall being adjustment u/s 92CA 2,50,60,886 The above shortfall of Rs. 2,50,60,886/- is treated as transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer's international transactions." 14. The addition suggested by the TPO in his order was incorporated by the AO in his draft assessment order....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f comparables. 4. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Pvt. Ltd. (supra), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon'ble Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an acquisition and restructuring during the year under consideration. 10. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 11. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra). 17. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies Pvt. Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:- "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have n....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The Bangalore Bench of ITAT in IT(TP)A Nos.195/Bang/2016 & 459/Bang/2017 for Assessment years: 2011-12 & 2012-13 in the case of FNF India Private Limited Vs. ACIT order dated 3.7.2019 had an occasion to deal with identical issue and the Tribunal held as follows: "14. In Gr.No.11 the Assessee has contended that the TPO and the DRP erred in adding to the average arithmetic profit margin of the comparable companies chosen by the TPO, negative working capital adjustment. On the above ground, it is undisputed that the Hyderabad Bench of the ITAT in ITA.No. 206/Hyd/2014 for Assessment Year 2009-2010 in the case of Adaptec (India) P. Ltd. Vs. The ACIT, Circle 1(1), order dated 25.3.2015 held that no such addition can be made for the following reasons:- "Ground No.8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any ne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the arithmetic mean margin of the comparables shall not be made." In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made." 15. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment." 16. It is undisputed that the Assessee is also a captive service provider such as the Assessee in the case decided by the ITAT Hyderabad Bench and therefore making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks, was not correct. Following the aforesaid decision, we allow Gr.No.11 raised by the Assessee. All other grounds relating to Transfer Pricing were not pressed. The grounds with regard to Charging of interest u/s.234A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ount of exempt income is Rs. 9,64,943 and in the given facts and circumstances of the case, it would be just and appropriate to hold that disallowance u/s. 14A of the Act cannot exceed the exempt income. The Hon'ble Delhi High Court in the case of Joint Investments (P) Ltd. v. CIT, 372 ITR 694 has taken the view that disallowance u/s. 14A of the Act cannot exceed the exempt income. Similar view was expressed by the Hon'ble Delhi High Court in the case of CIT v. Holcim India Pvt. Ltd., 272 CTR 282 (Del). These decisions were considered by the Mumbai Bench of the Tribunal in the case of Future Corporate Resources Ltd v. ACIT, ITA No.4658/Mum/2015 dated 26.07.2017 relating to AY 2011-12 and it was held by the Tribunal Mumbai Bench that disallowance u/s. 14A of the Act cannot exceed the exempt income. Following the aforesaid decisions, we hold that disallowance u/s. 14A of the Act in the present case should be restricted to the exempt income earned by the assessee. Accordingly, the AO is directed to restrict the disallowance u/s. 14A to the exempt income earned by the assessee. 26. As far as ground No.8 raised by the assessee is concerned, the issue is with regard to the set off of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r VI for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression 'total income of the assessee' in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in section 10A as 'total income of the undertaking'. * For the aforesaid reasons it is held that though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and' not at the stage of computation of the total income under Chapter VI. " 28. The effect of the aforesaid decision would be that the provision of set off and carry forward as contemplated under Chapter-VI of the Act would not be attracted and therefore intra head set off sought by seeking to rely on the provision of section 70(1) of the Act and seeking to restrict the deduction u/s 10A and 10AA of the Act to the extent of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained. W....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted is not 13.64% as done by the revenue authorities, but LIBOR rate of interest. Similar direction and decision in this assessment year, in our view, would be just and proper and we hold and direct accordingly. 34. Similarly ground Nos. 3 to 5 raised by the assessee are with regard to extended credit period on trade receivables allowed by the assessee. In respect of this issue, while deciding ground No. 4 raised by the assessee in AY 2010-11, we have already held allowing extended period on trade receivables was an international transaction and that income attributable on such extended period should be the LIBOR rate of interest and not 13.64%. Similar direction in the present assessment year would be just and appropriate and we hold and direct accordingly. 35. As far as ground No.6 raised by the assessee is concerned, the same is with regard to determination of ALP in respect of transaction of rendering of software development services by the assessee to its AE. There is no dispute that the transaction in question is an international transaction and that TNMM is the most appropriate method for determining the ALP of the international transaction. The TPO chose 13 comparable....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the order of the Learned TPO which had rejected a comparable company, namely CG VAK Software and Exports Limited, selected by the Appellant by holding that this company was not found in the public domain / information was not available for the same despite the Appellant furnishing details of the same." 38. As far as ground No.6(b) is concerned, we find that the assessee had given the annual report of CG VAK Software & Exports Ltd., but the TPO took the view that the financial details of this company was not available in the public domain and rejected this company as a comparable company. The DRP upheld the action of the TPO without noticing that the assessee has specifically pointed out before the DRP that the information regarding this company in the form of annual reports was very much available. Since the comparability of this company has not been examined in the light of financial statements of this company already available on record, it would be just and proper to direct the TPO to consider the comparability of this company afresh in the light of the annual report of the company which is already available on record. We hold and direct accordingly. 39. Ground No.6(c)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s assessee and hence not comparable functionally. As regards Sasken Communication Technologies Ltd. is concerned, the Tribunal vide para 9.3.1 of the aforesaid order held that this company was into the software products, software development services and other services and therefore cannot be compared with the assessee functionally. Regarding E-Zest Solutions, the Tribunal in the aforesaid order vide para 9.1.1 to 9.1.3 held that the issue with regard to comparability of this company should be remanded to the TPO for fresh consideration. We accordingly remand the comparability of this company for fresh adjudication by the TPO.As regards E-Infochips Ltd. is concerned, the Mumbai Tribunal in the case of Ness Technologies Pvt. Ltd. in ITA No.696/Mum/2016 for AY 2011-12, order dated 11.11.2016, vide para 6 of the order, held that this company was not comparable as it was providing varied services and not purely software development services provider and hence functionally not comparable with a SWD service provider such as the Assessee. As far as ICRA Techno Analytics Ltd. is concerned, we find that this company was considered as not comparable company with software development services....